Intrinsic Calculation For The Howard Hughes Corporation (NYSE:HHC) Shows Investors Are Overpaying
I am going to run you through how I calculated the intrinsic value of The Howard Hughes Corporation (NYSE:HHC) using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Howard Hughes here.
Crunching the numbers
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Generally I like to use analyst consensus estimates for free cash flow, but given that HHC has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these figures at the cost of equity of 10.44%. This resulted in a present value of 5-year cash flow of US$1.15B. Want to know how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how HHC’s earnings are expected to move in the future, which should give you an idea of HHC’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes US$3.30B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$4.44B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $103.05, which, compared to the current share price of $136.41, we find that Howard Hughes is rather overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For HHC, there are three fundamental aspects you should look at:
Financial Health: Does HHC have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does HHC’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of HHC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
